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A performance evaluation of portfolio insurance under the Black and Scholes framework: An application of the economic index of riskiness

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  • Lu, Richard
  • Horng, Tzyy-Leng
  • Horng, Min-Sun
  • Wang, Amy Z.-H.

Abstract

The investment performance of an option-based portfolio insurance strategy is compared with a buy-and-hold strategy under the Black and Scholes framework. Under this setup, we can derive the return distributions for the portfolio insurance and buy-and-hold strategies. According to the economic performance measure, which generalizes the Sharpe measure, the portfolio insurance with no transaction costs almost outperforms buy-and-hold in all scenarios studied. Further, if the percent of principal protected is chosen optimally, the portfolio insurance is better than buy-and-hold. Although the portfolio insurance loses some ground for short investment horizons with transaction costs, the portfolio insurance performs relatively well for long investment horizons.

Suggested Citation

  • Lu, Richard & Horng, Tzyy-Leng & Horng, Min-Sun & Wang, Amy Z.-H., 2023. "A performance evaluation of portfolio insurance under the Black and Scholes framework: An application of the economic index of riskiness," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 269-276.
    • Handle: RePEc:eee:quaeco:v:89:y:2023:i:c:p:269-276
    DOI: 10.1016/j.qref.2023.04.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Portfolio insurance; Economic Index of riskiness; Aumann-serrano index; Economic performance measure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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